Jawbone's demise a case of 'death by overfunding'

> I stock up on the old products on clearance because they don't make them anymore.

I often think about this when a company goes under, especially hardware focused ones. I assume it's only a matter of time that their servers will no longer accepting requests, APIs will no longer function and your device will suddenly become useless. Personally, I feel that this is a perfect use case where open source can shine by liberating locked down devices.

It also happened to be more rugged than Fitbit. I think Fitbit has caught up on the sleep tracking with their most recent models, but you still usually need to get a replacement before the warranty expires.

> what exactly is the mechanism that makes overfunding lead to a company's failure

It covers up problems until it's too late. Remember Color, the social network that spent like $500,000 on domain names [1]? Now imagine those kinds of decisions being made by every C-level executive. That's Jawbone.

Production issues, market-fit issues, et cetera could all be dismissed by management to shareholders and management to themselves on account of the massive, unaccountable cash pile. "Overfunding" means investors shifted too much control to management too early. (By contrast, well-funded teams know they will have to periodically check in with investors for future funding rounds. That motivates explicable behaviour.)

[1] https://techcrunch.com/2011/03/24/color-com-was-acquired-for...

The whole point of an acquisition is that the acquirer can realize value from the acquired firm that it couldn't get in the open market (e.g. via synergy with its own offerings, or by denying its competitors access to the technology, or just as an "aquihire" where the team is the thing being acquired and not the product). It's routine to see companies acquired that don't have a stable revenue stream, or even an obvious path to one. Think Google acquiring Android for a good example.

Perhaps the company operates in a market niche which doesn't have that much room for dramatic expansion. They could continue as a smaller, profitable company, but they get investment which expects a higher level of growth. So they try to radically break out of their speciality, but over-extend and go belly up.

To make a bad baseball analogy: VC is like trying to step up to bat, swinging at every pitch and only considering it a success if you hit a grand slam homerun.

If they'd taken less money, maybe they could have gone after a smaller (but more profitable) niche. Maybe they wouldn't have aggressively hired sales teams in as many countries across the globe.

Look at something like the VR/AR space - right now there's a firm upper limit to the number of potential buyers in that space. So, you have this whole sector where things got overfunded and _weird_.

Like what do you do when you've got $100mil in funding. VCs are expecting a Billion dollar exit. You've made a great product, but the timing is still too soon? That the whole industry needs 5 more years to mature?

I think it is that when investors invest, they expect you to use their money to grow quickly. You can't just sit on the money and grow at the same rate.

That means you end up getting huge offices, loads of employees, etc. It becomes a gamble that your product will be successful at a huge scale rather than a natural growth from a small scale. If it fails you still have the hundreds of employees and massive rent, but no revenue.

Another harmful effect is that overfunded startups are "zombie companies"; the traditional zombie is an old-school business propped up by a government:

https://en.wikipedia.org/wiki/Zombie_company

However, an overfunded company that is propped up by investors can make competitors unprofitable. For instance, Uber giving out half-price taxi rides has been harmful to everyone in that business. (Of course Uber made a deal to only offer service in the NYC area in NY and ban ride sharing in upstate because Uber wouldn't want to waste half-price rides on people in Albany, Syracuse and Buffalo who won't help them IPO -- and they don't want competitors to emerge there.)

You need to give your investors a decent return that implies revenue some many multiples of the investment.

If you are over-funded, the products that you have conceived, the markets that you are targeting, these need to change to deliver the return now needed.

At some point, the very company itself has to change to be something else. A lot of companies struggle at this point, and in essence the problem is self-created by taking on too much investment as the original market and product may have been just fine for a lower return that would have satisfied the first few rounds of investors.

  So, what exactly is the mechanism that makes
  overfunding lead to a company's failure?

They wouldn't be a billion-dollar failure if they'd failed with ten guys and $10 million :)

IMO there are a vast number of problems caused by overfunding that can compromise a company. Other users have already brought up some.

But the one most salient in my mind is that overfunding removes the pressure to ship.

I've seen this often from repeat entrepreneurs who are able to secure a large amount of financing for their new ventures, and wind up bikeshedding over the perfect product.

Instead of releasing quickly and iterating quickly, the immense amount of cash causes the company to move more slowly than they otherwise would.

Overfunding also bypasses some of the sanity checks that are supposed to exist in the VC system - that a company receives enough funding to get to some future milestone that demonstrates success. A bank account flush with cash removes the need to justify your own existence to investors on a regular basis, and causes companies to not realize strategic errors until it may be too late.

Eric Paley from Founder Collective has written a lot about the mechanics of over-funding. The basic mechanism is that companies start scaling marketing efforts that don't return $1 for a $1 investment.

That's obviously startup 101 stuff, but scale makes a huge difference. Losing money is fine if there is a long term network effect, but more often than not it's just an effort to make toppling growth look good enough to attract a VC in the next round.

So instead of being a modest company, that's nearly profitable with loads of potential, you become a company that is wildly expensive to keep afloat and seem to have less potential since you've already spend hundreds of millions experimenting with acquisition. Instead of having a million potential customers, there are maybe a couple dozen VCs that can make or break your future. That's overly generalized, but here's a reading list for a more detailed explanation:

Wasting Time with the Startup Joneses:

https://techcrunch.com/2015/07/30/wasting-time-with-the-jone...

When Burn Rate Outweighs Enthusiasm:

https://techcrunch.com/2016/01/13/never-let-burn-rate-outwei...

VC is a Hell of a Drug:

https://techcrunch.com/2016/09/16/venture-capital-is-a-hell-...

Overdosing on VC: Lessons from 71 IPOs:

https://techcrunch.com/2016/10/15/overdosing-on-vc-lessons-f...

You get lazy with too much money and don't sweat details.

One of the on the ground quick ways to assess whether a company is going to succeed or fail is to look at the supply closet. If it's packed with stuff, you'll find other sloppiness and lack of discipline elsewhere.

unless you're apple or tesla, hardware is a really tough business

The big difference to me is that I think that Pebble had successfully found a small niche as the alternative smartwatch with considerable customer loyalty. If they would have stayed small I think they would have been a very successful company.

Jawbone was in a larger market with more competition and much less customer stickiness. I believe that they were in more of a "go big or go home" scenario.

Exactly my thought. Pebble was fine until they took a funding round and suddenly had VCs pushing them to become "the next Apple". Then they hired way too many people, refocused on where they thought 'the big market' was (ie. fitness) rather than where their market was (ie. long battery life, e-paper based smartwatches with an open application ecosystem), and tried to pump out new models too fast.

It seems a recurring theme in SV that companies neglect to consider the overall market size for their niche product when deciding how large to try and scale their business.

sama wrote a good article about this a few months ago[0]. The key quote as it applies here:

"The second most important thing to understand is that raising too much money or raising money at too high a valuation can severely limit your optionality. Very often I’ve seen cases where founders know in their hearts they have an airplane but are able to convince good investors it might still be a spaceship. This really causes a lot of heartache, and often precludes your opportunity for a good acquisition later."

[0] https://blog.ycombinator.com/navigating-mid-success/

I wonder if this is true of the hardware wearable market on general. There's a solid set of niches but none are going to be hugely profitable on their own in the near to medium term due to a small market size. Apple is beyond "over funded", both in terms of equity and investor perceptions, so it can stay in on the hopes it eventually pans out.

IMO it seems like they just lacked focus and abandoned their core competency to follow trends in markets where they couldn't compete. They started out as a military contractor and pivoted that tech into fantastic bluetooth headsets. From there they went on to make great bluetooth speakers.

At some point they acquired a medical devices company and hopped on the fitness tracker bandwagon, it's that point they seemed to have lost their way. After a string of crappy fitness trackers, and completely ignoring their headsets and speakers, they failed.

I am not a fitness target customer, but I also had no market knowledge about the fact that jawbone was in the tracker space. They must have had great market domination in the headset space, as they are the only brand I can identify from memory.

Always sad to see a product company chase a trend based on investor sentiment, with negative outcomes.

It depends how you define profitable. Many unicorns and tech companies have a lot of debt and funding but are cashflow positive.

Amazon

Facebook got a lot of investments ( https://www.crunchbase.com/organization/facebook ) before they became profitable (pretty much one of the only companies to successfully challenge Google in the ad business). And Slack AFAIK is profitable, and they've had hundreds of millions in funding ( https://www.crunchbase.com/organization/slack ) but I think they were profitable pretty early on and just raised money because the terms were good rather than because they strictly needed to.

These aren’t contradictory: all of those problems are harder to notice when you’re overfunded.

48% margins.

I agree... they once had a nice product, but failed to skate to where the puck was going, became a me too company... with no differentiating vision. Go-Pro already pretty far down the same path.

Is anyone buying any smartwatch stuff?

Wasn't Apple even lumping their Watch sales figures into the "Other" category along with the Apple TV out of embarrassment.

I remember the weird company name due to frequent TV ads. I don't remember the product. Only the weird name and the confusion about the unclear product stuck.